Presentation is loading. Please wait.

Presentation is loading. Please wait.

CHAPTER 5 Activity-Based Cost Systems. A Review: Direct and Indirect Cost  Direct cost: cost that are traceable to a product, activity, or department.

Similar presentations


Presentation on theme: "CHAPTER 5 Activity-Based Cost Systems. A Review: Direct and Indirect Cost  Direct cost: cost that are traceable to a product, activity, or department."— Presentation transcript:

1 CHAPTER 5 Activity-Based Cost Systems

2 A Review: Direct and Indirect Cost  Direct cost: cost that are traceable to a product, activity, or department (a cost object).  DM&DL  Indirect cost: cost that are not traceable to a cost object. Instead, this type of cost is normally common to more than one cost objects and needs to allocated.  OH, selling costs, general & administration costs.  Indirect cost needs to be allocated among the cost objects.

3 TERMS USED IN COST ALLOCATION  Cost pools  grouping of a set of homogeneous costs whose total is allocated using one allocation base.  Cost pools can be organized along  departmental lines, e.g. Maintenance, Personnel depts.  major activities, e.g. equipment setups, inspections.  Cost object  something that you are trying to estimate the cost of, e.g., product, department, project, customer, etc.  For example, if computer costs are allocated to contracts, the contracts are the cost object

4 TERMS USED IN COST ALLOCATION  Cost driver  something that cause cost to change, e.g., pounds of direct material, # of setups, # of inspections, etc.  Allocation base  the denominator used to assign cost. This can be a cost driver, or something convenient, e.g., # of units, machine/ labor hours.  An allocation base relates cost pool to the cost objects

5 Historical Origins of Cost Allocation Methods  Traditional volume-based costing (peanut butter costing)  Original ABC: introduced in the 1980s  Time-driven ABC (TDABC): A contemporary version of ABC introduced by Dr. Robert S. Kaplan and Dr. Steven Anderson in 2004.

6 Traditional Costing vs. ABC  Traditional costing  spreading common cost evenly over units, products, departments, or other volume-based allocation basis (Peanut- butter costing)  under costing (estimated costactual cost), resulting in over pricing and losing units of sales. XYZ company example (handout)

7 Activity-Based Costing (ABC)  Activity-based cost systems have been developed to eliminate distortion  Activity-based cost (ABC) assign resource expenses to activities

8 Activity Cost Drivers  Activity cost drivers represent the quantity of activities used to produce individual products: ACTIVITYACTIVITY COST DRIVER HANDLE PRODUCTION RUNSPRODUCTION RUNS SET UP MACHINESSETUP HOURS SUPPORT PRODUCTSNUMBER OF PRODUCTS RUN MACHINESMACHINE HOURS PROVIDE FRINGE BENEFITSLABOR DOLLARS

9 Original ABC vs TDABC  Kaplan and Anderson (2004) Article (handout)  E5-25 Pg 200


Download ppt "CHAPTER 5 Activity-Based Cost Systems. A Review: Direct and Indirect Cost  Direct cost: cost that are traceable to a product, activity, or department."

Similar presentations


Ads by Google